Tax rises of £8bn needed to control public sector debt, says IFS

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The Independent Online

A devastating verdict on the public finances was delivered yesterday by the respected Institute for Fiscal Studies (IFS). In its latest "Green Budget", the IFS argues that the Chancellor, Alistair Darling, would need to announce fresh tax increases amounting to about £8bn in this year's spring Budget to keep public sector debt below the Government's self-imposed ceiling, and to bring about the improvement in the public finances over the next five years that the Treasury predicts.

Without tax rises, the IFS said, "we expect the Government to have to borrow more than £40bn this year, next year and in 2009-10. We expect public sector net debt to hit the Government's ceiling of 40 per cent of national income in 2009-10 and to rise to 41.2 per cent by 2012-13. The Government would also break its 'golden rule' [to borrow only to pay for investment] over the new economic cycle". The IFS suggests the tax burden will rise to a quarter-century high by 2011-12.

However, "not least because of the Government's current political difficulties", the IFS does not expect to see a significant early fiscal tightening. "The Government is likely to argue that further bad news on the public finances will only be temporary and that fiscal policy should support monetary policy as the economy slows this year," it says.

But, the IFS argues, "temporary problems in the financial sector can have a bigger and more persistent effect on the public finances than the Treasury initially expects". The potential damage to the public finances by Northern Rock's liabilities also looms large. "This would probably add £100bn, or 7 per cent of national income, to public sector net debt. The Government should publish public finance figures with and without the impact of Northern Rock," the IFS said.

What the IFS calls "unpopular" decisions to stage public sector pay awards recommended by pay review bodies "generate only modest one-off financial savings, make little contribution to the fight against inflation, and threaten to undermine the credibility of the pay review body process".